The Public Debt Management Office is now experiencing minimal pressure in debt servicing in the current fiscal year 2023-24 as the interest rate to be paid to domestic creditors has been going down.

Though the overall public debt has been rising, pressure has eased this fiscal year because of lowered interest rates amid the excess liquidity in the banking system.

Banks and financial institutions are major creditors to the government who procure the government’s debt instruments such as development bonds and treasury bills.

“Average interest rate on the domestic debt has gone down to 3–4 percent this fiscal year compared to 10 percent last fiscal year,” said Dilaram Giri, information officer at the PDMO.

The government has allocated Rs330.55 billion to repay loans in the current fiscal year. “I think it will be enough to pay the loans this fiscal year,” said Giri. The total disbursement of debt as of the second quarter of this fiscal stood at Rs51.41 billion, according to the PDMO.

But the PDMO was forced to secure extra funding from the government than the initially allocated amount to repay the loans in the last fiscal year.

The banking sector was facing a liquidity crunch in the last fiscal year, which led to an elevation in the interest rate. This forced the government to spend more on debt servicing.

According to the PDMO, the government’s spending on debt servicing nearly doubled last fiscal year amid Nepal’s ballooning public debt along with high interest rates applicable to internal loans.

The government spent Rs222.74 billion in debt servicing, including principal repayment and interest, in the fiscal year 2022-23.

The figure is a rise of around 83 percent from the previous fiscal year, according to PDMO. The spending under the heading was Rs121.99 billion in the fiscal year 2021-22. In the fiscal 2020-21, the government spent Rs95 billion in debt servicing.

Of the total interest of Rs72.78 billion paid last fiscal year, Rs64.51 billion went against domestic debt alone, according to the office.

For example, the government had offered as much as 9.2 percent in interest for subscriptions of development bonds in the last fiscal year 2022-23, according to Nepal Rastra Bank (NRB), which is responsible for raising domestic debt for the government.

The government has so far offered a maximum interest rate of seven percent and the interest rate offered in the last issuance of development bonds on February 8, stood at 5.92 percent only, the central says.

The average interest rate on treasury bills has been 3–4 percent in recent days, the NRB said.

Despite reduced pressure on debt servicing, the country’s debt is on the rise. At the end of the second quarter of the current fiscal year, the country’s total outstanding debt reached as high as Rs2,383.77 billion, which accounts for 44.23 percent of the Gross Domestic Product (GDP).

The country’s debt liability to domestic and external creditors is evenly shared now after a portion of domestic debt rose sharply in recent years, according to PDMO.

Nepal’s debt liability has risen sharply since the country was hit hard by the deadly earthquake in 2015. The country had to borrow massively for the reconstruction of damaged infrastructure and Covid pandemic emerged as another whammy that also forced the government to borrow more.

As a result, the debt to GDP ratio which stood at just 25.6 percent in 2014-15 rose over 44 percent now.

However, Nepal’s overall debt to GDP ratio has remained lower than average debt to GDP ratio of South Asia which stands at 86 percent, according to the World Bank.

“Though the debt to GDP ratio is growing, we are still in a comfortable position in terms of debt repayment,” said Giri. “Our strategy is now not to contain the debt to GDP ratio below 50 percent,” said Giri.